Adam Smith's Lost Legacy

GavinK9 AT gmail DOT com

Monday, May 31, 2010

A Word or Two From Adam Smith on Regulating Interest Rates

In a largely neglected topic discussed by Adam Smith (including by myself) I have found myself undecided about the merits of the arguments for and against his position (which itself is not very clear or decisive). I refer to the occasional laws introduced on usury and the long established theological prejudice against interest, still encountered in Islamic communities.

Wealth Of Nations discusses the subject in Books I and II. Smith noted how the ‘profits from stock’ rise or all in some relationship with the rate of interest (WN.I.ix.4: 105). Typically, Smith traces the historical record. Henry VIII passed a law declaring all interest above 10 per cent ‘unlawful’, while Edward I, from his ‘religious zeal’ prohibited all interest. Smith didn’t think much of this or its effect, which ‘probably increased rather than diminished the evil of usury’ (WN I.ix.5: 106). The editors of the Glasgow edition of WN append a footnote quoting Cantillon’s Essai (278-9, ed. Higgs, 211):

‘Nothing is more amusing than the multitude of Laws and Canons made in every age on the subject of the Interest of Money, always by Wiseacres who were hardly acquainted with Trade and always without effect.’

James VI and I (first King of Scotland and England) reduced it to 8 per cent (1623), Charles 1 to 6 per cent (1661) and Queen Anne to 5 per cent (1713). Smith remarks that these official maxima ‘seems to have followed’ the market rate of interest. He notes that before the ‘late war’ (1750) the government borrowed at 3 per cent rising to a peak of 4.5 per cent (1755).

Smith returns to the subject in Book II. The permitted rate tends to be related to its general market price available to ‘those who can give the most undoubted security’, and the anti-usury rate ought to be fixed somewhat above the market rate (if fixed below the market rate it would choke off lending and ruin ‘honest people’). He illustrates the British example where the rate of interest paid on government bonds was 3 percent, and private people with good security pay 4 to 4.5 per cent, with the legal rate (maximum) was 5 per cent, which was ‘perhaps as proper as any’ (WN II.iv.14: 357).

He further observed that if the legal maximum was ‘so high as eight or ten per cent’ then the ‘greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest’, adding that ‘Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition’. In consequence a ‘great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which are most likely to waste and destroy it’. Contra-wise, where the legal rate is fixed ‘but a little above the lowest market rate, the greater part of the ‘capital is thus thrown into the hands in which it is most likely to be employed with advantage’ (WN II.iv.15: 357).

This seems an eminently sound analysis, and typically Smithian in his ‘sober’ manner where pragmatic sense meets ideological purity, bearing in mind his many strictures against the role of ‘prodigals and projectors’, whose activities added to the flow of funds to wasteful prodigals (‘every prodigal appears to be a public enemy; WN II.iii.25: 340) or careless loss-making projectors (spenders on ‘injudicious and unsuccessful project[s]’; WN II.iii.26: 341) instead of putting to work productive labour which causes the resultant growth of national output.

Jeremy Bentham (Letter XIII, Defence of Usury), addressed to Smith objected, partly on the grounds that ‘such a regulation was a violation of Smith’s own principle of liberty, and partly on the ground that it would discourage those men of enterprise upon whom the economic process would depend’ (editors’ note: WN II.iv.15n 17; n 19: 357).

I do not regard Bentham’s criticism as decisive. Smith departed from the principle of liberty on several occasions – and quite rightly too. He was not an ideologue, which may disappoint several relatively uninformed readers of Smith and a few of those whose interpretations of Smith are based on their own ideological focus (of which a few Libertarians, though not all, i.e., those who live in the real world and who have a perspective of history short of the possibilities of an imaginary utopia, are wont to do).

Smith made several exceptions to ‘the liberty principle’ in banking (small denomination currency notes), in British trade (the Acts of Navigation), in tariffs (the need to fund government expenditure) and in safety (party walls to stop fire spreading).

Saturday, May 29, 2010

On the Genesis of the Myth of the Invisible Hand, no. 8

‘It was largely the operations of this principle [tendency of the rate of profit to fall] that Adam Smith had in mind when he employed the unfortunate metaphor that a free economy works as though it was guided by an invisible hand’ (p 173)’.

Comment
This is a monumental text, not recommended for the impatient.

However, Reisman gets marks for correctly describing the invisible hand as a metaphor (double for classing it as ‘unfortunate’), but gets no marks at all for attributing it – without any textual basis – to changes in the rate of profit:

‘as profit falls or rises, drawing more resources or reducing them to sectors according to the profit fall or rises’.

Smith’s use of the invisible hand metaphor had nothing to do with rises of falls in the rate of profit, except so tenuously as to be unsupported by the English language, as used by Adam Smith.

Also there was no such use of the words, ‘as though it was guided by an invisible hand’.

Friday, May 28, 2010

Did Keynes Recant on his Death Bed?

Even John Maynard Keynes recognized his central planning approach to economics could not work. Ten days before his death he stated:

"I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago."

The reality is that Keynes not only removed the concept of markets (the invisible hand) from economic thinking, he also set economic thinking back centuries.Markets work, governments do not. That is not to suggest there is no role for government in policing or overseeing markets. It merely means that government cannot perform the functions that markets do. They do so easily, efficiently, costlessly and invisibly, at least in comparison to states.'

(Monty Pelerin www.economicnoise.com)

CommentFirst if Keynes did say this, the significance for Lost Legacy is its date. Keynes died on 21 April 1946, so his ‘deathbed conversion’ to ‘capitalism’ occurred on 11 April 1946 and reverses what Keynes claims to have done 20 years earlier, i.e., 1926.

[I cannot vouch for the provenance of this claim as I do not know Monty Pelerin, but I shall enquire about his sources.]

This is interesting. I don’t know how widely Keynes’s statement circulated – was it published in newspapers? – though I am not surprised at Keynes’ – and anybody else’s – reaction to the war economy, state-dominated, highly regulated, management of rationing of consumer and production goods by governments and civil servants that characterized 1946 Britain at the time.

A privileged man, brought-up among the upper classes and living among the genteel and socially pampered milieu of the Bloomsbury set, was bound to revolted by the mean, drabness of state-controlled Britain, one step ahead of the wartime destruction of Europe. From that perspective, open markets must have looked tasty.

Similar thoughts across the Atlantic seemed to be stirring at MIT in the thinking of Paul Samuelson, prompted, perhaps, by Oscar Lange and his plans to substitute what he believed was ‘an invisible hand’ with intentional socialist co-ordination by state planning. Samuelson set out to ‘re-claim’ the ‘invisible hand’ for capitalism, unfortunately creating myth instead.

US wartime controls reached nothing like the level ‘enjoyed’ by rationed Britain until the 1950s. I remember well the powdered substitute for fresh eggs that came in large tins with the US Flag stamped on the side, making me wonder at the distant land that had such ‘luxury’ to spare (though I remain grateful for it).

Wednesday, May 26, 2010

On the Genesis of the Myth of the Invisible Hand, no. 7

David Begg, Stanley Fisher and Roger DornbushEconomics (1984) New York: McGraw-Hill (British Edition of a popular US text)

‘The Invisible Hand’

‘Smith argued that individuals pursuing their self-interest would be led “as if by an invisible hand” to do things that are in the interests of society as a whole …Smith argued that the pursuit of self-interest, without any central direction could produce a coherent society making sensible decisions’ (p 11-12).

‘Market FailureWe begin by showing that in the absence of any distortions a freely competitive equilibrium ensures allocative efficiency. We use the term market failure to cover all circumstances in which equilibrium in free unregulated markets (i.e., markets not subject to direct price or quality regulation by the government) will fail to achieve an efficient allocation. Market failure describes the circumstances in which distortions prevent the invisible hand from allocating resources efficiently” (333).

‘If every market in the economy is a perfectly competitive free market, the resulting equilibrium through out the economy will be Pareto-efficient. Formulating Adam Smith’s remarkable insight of the Invisible Hand, this result is the foundation of modern welfare economics’ (769).

Comment

Assertions do not a theory make.

Smith did not link the metaphor of an invisible hand to perfect competition (a 20th-century idea unknown to Smith; his ideas from 17th-century moral philosophy on ‘natural liberty’ are often confused with modern ideas of perfect competition).

His examples of the invisible hand were from anything but competitive economies. In Moral Sentiments he referred to ‘rich landlords’ having to feed the ‘thousands whom they employed’ under feudal conditions (they had no choice but to do so – whom else would labour in their fields under feudal – and pre-feudal – tutelage? Those times were not competitive labour markets nor competitive employers.

In Wealth Of Nations he referred to merchants in 18th-century, mercantile Britain who preferred to invest at home – investing abroad carried higher risks – and they did not operate in perfectly competitive markets. Quite the reverse: the Guilds and Incorporated towns, the Settlement Acts, the Apprenticeship Statutes, the Poor Laws, the tariff regimes, prohibitions and the Navigation Acts, were nowhere near perfectly competitive institutions. Smith was referring to these merchants in these circumstances and only lack of knowledge of the context could lead modern economists to link the metaphor in Smith’s name to perfect competition and Pareto-welfare theories.

A Voice of Realism on the Invisible Hand no. 1

‘We argue further that Smith’s reference to the invisible hand and market prices gravitating to the natural prices does no imply some unusual causal laws which are waiting to be discovered by economists. When Smith uses the expression he speaks metaphorically in order to suggest that free commerce is well ordered because of the social value patterns in which the actors are committed. As participants in market economics, people are so familiar with the rules of the process that their freedom of action itself reflects these rules, giving them the appearance of causal laws. Hence, real market prices continuously move up and down as if they are gravitating towards some average which the actors recognise as the normal or natural value’ (p. xi).

‘Chapter IV The Invisible Hand and Mutual Sympathy’ (114-56).

‘Where does the modern version of the theory [General Equilibrium] leave the invisible hand? … On the one hand there is good news: the intuitions of Adam Smith and many later [economists?] can indeed be vigorously formulated and proved. The bad news is that the theorems depend on a host of conditions, many of dubious realism … The modern version might be taken to refute, not to support, the applicability of visible hand propositions to real-world economies’ (p. 115).

CommentThis is a new, though comparatively thin, series (unless readers know of more examples – hint, hint). Like the example of Jan Peil (disclosure: I have no knowledge of him or his work – other than reading his book), I occasionally come across such writings, which I would class as the early heroes of those who tell us that the ‘emperor is naked’ when they look closely at what the ‘emperors’ tell us.

It should be noted that the linking of Smith’s use of the metaphor of the Invisible Hand to General Equilibrium theory arose from the earlier linking of the metaphor to ‘perfect competition’ in the 1940s.

Paul Samuelson passed this idea on in his 1948 edition of his splendid undergraduate text, Economics: an introductory analysis, McGraw-Hill, 1948, from the oral tradition in the 1920s and 1930s at the University of Chicago, from which he graduated in 1935.

Tuesday, May 25, 2010

On the Genesis of the Myth of the Invisible Hand from the 1950s no. 6

‘Among the main points made in [Wealth Of Nations] are the importance for a nation’s prosperity, of freedom of trade and the division of labor, the dangers of governmental politics of monopolies and the imposition of tariffs, and the superiority of self-interest - the instrument of the “invisible hand” – over altruism as a means of improving the economy’s service to the general public’ (593)

[Appendix] ‘The Invisible Hand in the Distribution of Goods and in Production Planning’ (599).

Comment
Passing remarks of no great importance, except they remind readers of their first year tutors’ assurances of the existence of an invisible hand as a noun not a metaphor.

Monday, May 24, 2010

A Must of a Book Review

At last, a book worth a look for a shaft of optimism about the future of the human species by Matt Ridley. Read the review by Jon Henley (slightly hostile, but then The Guardian newspaper over-doses on left-of-centre pessimism, which is all the fault of capitalism, etc.,) HERE:

Matt Ridley: 'We can overcome disease, poverty and climate change'

The author of The Rational Optimist on why life on earth is bound to get better

[Copyright laws persuade me not to reproduce the review; the left-of-centre Guardian notoriously protects property rights in its columns. I have no wish to test the depths of their alleged liberal conscience]

On the Genesis of the Invisible Hand Myth from the 1950s No. 5

Richard B. McKenzie and Gordon Tullock, Modern Political Economy: an introduction to economics, 1978, p. 111-12. McGraw-Hill, New York.

The ‘invisible hand’ passage is quoted at the head of chapter 7 and the sub-heading of the section is:

‘The Invisible Hand of the Market’.

‘[Mercantilists] were very skeptical that the “invisible hand of the market” could satisfactorily deal with such complex issues’ (p. 112).

‘Consumers get more of what they want at a lower price. In this way, the drive of self-interest acts like an “invisible hand”, guiding social order to an accumulation of improvements in social welfare’ (p. 112).

Comment
I first bought and read McKenzie and Tullock in the mid-1970s and was very impressed with it. It was not used as a textbook for a course, though I recommended it to students as supplementary reading. Hence, I was disappointed to look through it again for this exercise.

The ahistorical statement about ‘mercantilists’ being ‘skeptical’ is a sign of the author’s detachment from reality – they knew nothing about the “invisible hand of the market” and would only know of the ‘invisible hand’, if they knew anything at all about it, as an expression used by theologians and in church sermons through the 17th and 18th centuries. In fact, nobody knew of the “invisible hand of the market” – not even Adam Smith! – until it was invented as an idea in the 20th century by modern economists.

As for ‘the drive of self-interest acts like an “invisible hand”’, that was part of the modern invention, which, be clear, is absolutely fine; it’s the attribution of these ideas to Adam Smith which is the target of Lost Legacy.

Out of respect for the two authors I shall refrain from further comment.

Sunday, May 23, 2010

On the Genesis of the Invisible Hand Myth from the 1950s No. 4

‘Smith spent much of his life as a professor of moral philosophy at the University of Glasgow in Scotland.

[Inset: Quote from Book IV.ii. 9: Adam Smith on the “invisible Hand” and Specialization, page 17.]

‘(Smith) was among the first to describe how a free, competitive economy can function – without central planning or government interference – to allocate resources efficiently. He recognized the virtues of the “invisible hand” that leads private interests of firms and individuals toward socially desirable ends, and he was properly suspicious of firms that are sheltered from competition, since he recognized the potentially undesirable effects on resource allocation’ (p.18).

Comment
Smith spent 13 years as a professor at the University of Glasgow (1751-64) and died when he was 67 (1723-90), which does not amount to ‘much of his life’.

‘Efficiency’ was not central to Smith’s thinking, at least to the extent that it became important to 20th-century economists.

He did not recognize ‘the virtues of the “invisible hand”’. A literary metaphor is unlikely to be considered to have ‘virtues’, other than those associated with its suitability for adding ‘beauty’ to its object in a ‘more striking and interesting manner’ (Adam Smith, Lectures on Rhetoric and Belles Lettres, (1763, p 29).

These misleading ideas were passed onto innocent students in their thousands, many of whom repeated them to their students, their readers, their viewers and their voters. Hence, the almost irresistible false provenance of the invented myths about invisible hands that dominates our discipline. It wouldn’t matter except that people believed them and acted – or didn’t – as the cases may be in the second half of the 20th century and the first decade of the 21st.

Saturday, May 22, 2010

On the Genesis of the Invisible Hand Myth from the 1950s No. 3

‘By the time that Adam Smith wrote The Wealth Of Nations in 1776, the dictates of the church that restrained economic abuses were replaced by the dictates of competition, which surprisingly exerted an even stronger effect, and in the same direction. Adam Smith’s “Invisible Hand” was competition. According to Smith, businessmen were selfish, and concerned only with their own personal gain. Greed ruled economic behavior, but competition restrained this greed, this desire to maximize one’s own economic good, and channeled it into maximizing the public good. Not altogether, of course, but the effect of competition was noticeable, for the following reasons.

Each producer had such a small part of the total market that he or she could not control the price of a given product and thus gain an advantage over others. Each small producer seeking customers had to produce at the most efficient level, turn out the kinds of products and services the consumer wanted, and sell them at the lowest price commensurate with staying in business. The selfishness of these small producers was guided, as if by and Invisible Hand (competition), to maximize the welfare of society at large. …

… So the tenets of the medieval church no longer exercise the force of law over people, and monopoly power has weakened Adam Smith’s Invisible Hand of competition.’ (p 97).

Comment
From what authority did Willis and Primack link Adam Smith’s use of the metaphor of an invisible hand to competition?

Certainly not from Smith’s Wealth Of Nations.

Smith related the metaphor to the degree of insecurity of some, but not all, merchants. Those that were insecure about foreign or distant trade were led by their insecurity to invest locally and the consequence was that local – and in he aggregate, national – output and employment was larger than it would be if they invested abroad. A larger national output and the related employment was a measure of a country’s wealth and its spread of opulence.

Nor did he describe the behaviour of merchants as ‘selfish’. For Smith self-interest was far more nuanced than selfishness. It played a positive role too. A person’s self-interest could induce him to feed himself and his family – a person neglecting to do so would not be well regarded. Greed was always – still is – present wherever a number of humans congregate; it was not regarded a dominant force such that it ‘ruled economic behavior’.

Even from a slight acquaintance with Britain in Smith’s time would surely show Willis and Primack that the economy of the day was hardly competitive in the manner they suggest.

Trade Guilds and Incorporated Towns ran legal monopolies, supported by other legislation (not Church dogmas), which inhibited competition. Smith wrote extensively on the non-competitive nature of economic life in 18th-century Britain and its colonies in North America.

Ironically, a few years after Willis and Primack’s 1977 volume, the myth of the Invisible Hand took on a rock-solid grip in the discipline and was said to be a work in 20th-century North America and Europe, despite the contrary evidence of the actuality and the historical evidence of the shallow roots of the phrase in Smith’s writings.

Sadly, everything we now know about the metaphor was knowable from the mid-1980s, except nobody was looking. Modern economists in the 21st century have no such excuses.

You may read my 2010 paper on Adam Smith’s use of the Invisible hand metaphor HERE

Friday, May 21, 2010

Not Everything Written About Adam Smith is True

‘The one area that Freeden has limited his definition is in wanting to keep ideology strictly in the political realm. He makes a reasonable case for this, but then again, that leaves no word to describe the post-1980 American fascination with the “invisible hand” of the free market. For instance: given that the free market can solve all problems, but the free market has no way to deal with global warming, then, ergo, global warming must not be a problem. I would label dogmatic economic beliefs like this an ideology, but Freeden probably wouldn’t, even with his much looser definition of ideology.’

CommentSee where crude mythology get economics? All avoidable if only the progenitors of the myth had read Adam Smith carefully; after all, its only one sentence in Wealth Of Nations using a metaphor to summarise the previous 8 paragraphs. Not exactly an onerous task!

A New Series on the Genesis of the Invisible Hand Myth from the 1950s No. 2

David Begg, Stanley Fisher and Roger DornbushEconomics (1984) New York: McGraw-Hill (British Edition of a popular US text)

‘The Invisible Hand’

‘Smith argued that individuals pursuing their self-interest would be led “as if by an invisible hand” to do things that are in the interests of society as a whole …Smith argued that the pursuit of self-interest, without any central direction could produce a coherent society making sensible decisions’ (p 11-12).

‘Market FailureWe begin by showing that in the absence of any distortions a freely competitive equilibrium ensures allocative efficiency. We use the term market failure to cover all circumstances in which equilibrium in free unregulated markets (i.e., markets not subject to direct price or quality regulation by the government) will fail to achieve an efficient allocation. Market failure describes the circumstances in which distortions prevent the invisible hand from allocating resources efficiently” (333).

‘If every market in the economy is a perfectly competitive free market, the resulting equilibrium through out the economy will be Pareto-efficient. Formulating Adam Smith’s remarkable insight of the Invisible Hand, this result is the foundation of modern welfare economics’ (769).David Begg, Stanley Fisher and Roger DornbushEconomics (1984) New York: McGraw-Hill (British Edition of a popular US text)

‘The Invisible Hand’

‘Smith argued that individuals pursuing their self-interest would be led “as if by an invisible hand” to do things that are in the interests of society as a whole …Smith argued that the pursuit of self-interest, without any central direction could produce a coherent society making sensible decisions’ (p 11-12).

‘Market FailureWe begin by showing that in the absence of any distortions a freely competitive equilibrium ensures allocative efficiency. We use the term market failure to cover all circumstances in which equilibrium in free unregulated markets (i.e., markets not subject to direct price or quality regulation by the government) will fail to achieve an efficient allocation. Market failure describes the circumstances in which distortions prevent the invisible hand from allocating resources efficiently” (333).

‘If every market in the economy is a perfectly competitive free market, the resulting equilibrium through out the economy will be Pareto-efficient. Formulating Adam Smith’s remarkable insight of the Invisible Hand, this result is the foundation of modern welfare economics’ (769).

Comment
I have no objection to anyone writing in an avuncular fashion if it helps their readers understanding. I do object, however, when the author completely misleads them about an eminently checkable set of facts with a distorted version of what the authority they purport to report upon wrote to the contrary.

Professor Bowden had not read Adam Smith when he wrote the above.

Smith never used the phrase ‘as if by an invisible hand’. He never linked the metaphor of ‘an invisible hand’ to a market process. He did not consider that ‘market processes’ always, or necessarily, did ‘the best things for society. They could do the ‘best things’, but as often do not.

Mercantile political economy – since the 19th century known by it German language root as ‘mercantilism’ – was not just a policy instituted by ‘government’. It was a commercial policy brought about by the clamour of mercantile interests (‘businessmen’) linking their persuasive influence to that of ‘sovereign kings’ not ‘sovereign consumers’. Kings were gullible from their need for money to fight continental wars (often merely dynastic squabbles) and to ‘maintain the dignity of their office’ (i.e., live in the splendour to which they were accustomed). Customs tariffs provided those resources and narrowed the market for the profitable benefit of ‘businessmen’. Its modern version is still with us and is a multi-billion dollar with, known as lobbying.

Smith reference to ‘an invisible hand’ was not about markets. It referred to the consequence of some, but not all, merchants, choosing to invest locally rather than abroad, because of their concerns at the risks of sending their capital to foreign countries or the British colonies in North America.

It followed that each merchant keeping his capital within his sight and with people he knew, and under a legal system he was sure of, added to local investment. This made national investment and the associated employment larger than it would have been if they were less ‘insecure’ and sent it abroad.

The consequence was not ‘magical’, nor mysterious. It was simply the necessary outcome of the arithmetic rule that ‘the whole is the sum of its parts’. The more parts, the larger were national output and employment, which Smith considered to be an important public benefits (output equalled ‘national wealth’ and employment equalled the ‘spread of opulence’, particularly to the otherwise poor).

This simple and singular observation of Smith’s was turned into a general statement that whatever businessmen and people did in pursuit of their self-interest ‘automatically’ benefitted society, which is a nonsensical statement and very unSmithian.

Thursday, May 20, 2010

A New Exposure Series on the Genesis of the Invisible Hand Myth from the 1950s No. 1

From John Lindauer, Economics: a modern view, 1977, W. B. Saunders Company, p.12:

‘Patron Saints: free-enterprise Adam Smith (1723-1790)’

‘As long as self-interest existed to keep people and firms working as hard as possible to produce the most valuable goods and services, as long as politicians and kings did not muddle up people’s behaviour by interfering with their freedom to produce and buy, the “invisible hand” of self-interest would guide the economy to prosperity.’

Comment
This is propaganda, not economic science, and pretty poor history too.

Lindauer writes as if ‘politicians and kings’ were autonomous agents in 18th-century mercantile political economy.

Where did legislators and those who influenced them get their protectionist ideas from if not the merchants and manufacturers whose self-interest led them (not an invisible hand!) to realise the benefits to them of tariffs and protection against foreign imports.

Politicians and kings responded – often for bribes – to the pleas of those merchants and manufacturers for ‘patriotic’ protectionism, who gained extra profit from the resultant higher prices by ‘narrowing the market’.

That was Smith’s candid message in Wealth Of Nations.

So what was new and different about the 1977 America and Europe in the textbook by John Lindauer? Nothing. Only worse. The plaintive lobbying business within the political system was well funded, well organized and flush with funds. Kings no longer interfered but the politicians did, and many of them made small fortunes and larger numbers of votes from doing so.

There was no ‘invisible hand of self interest’ but there was self-interest in promoting the propaganda of the myth of the invisible hand. That many respectable economists accepted without challenge the myth of the invisible hand (and many still do) is regrettable.

Monday, May 10, 2010

The Sad Sight of 'Holier Than Thou'

‘Comment after comment and story after story in the Gospels about Jesus relates to the treatment of the poor, generosity to those in need, mercy to the outcast, and scorn for the wealthy and powerful. And his philosophy is embedded with the central importance of taking care of others, loving others, treating others as you would want to be treated. There is no virtue of selfishness here, there is no "greed is good", there is no invisible hand of the market or looking out for number one first.’

CommentI have nothing to say about the theological implications of Mike Lux’s question that is directed at ‘conservative Christians’ who are better placed to answer him.

(I could ask Mike Lux how anybody became a ‘Christian’ like the zealots of Smith’s time, who ran a Taliban-type of established church and suppressed any signs of dissent to their rule, and were particularly oppressive by any standards towards the poor and disadvantaged who had no means of recourse for their troubles, and even worse to members of denominations of Christianity. They even made it difficult for Adam Smith to speak his mind on their behaviours.)

Adam Smith was not implicated in the obnoxious notions expressed by Lux in the sentence:

‘There is no virtue of selfishness here, there is no "greed is good", there is no invisible hand of the market or looking out for number one first.’

His book, The Theory of Moral Sentiments (1759) shows quite the opposite moral standards to the ‘Greed is Good’ outlook. His book, Wealth Of Nations (1776) shows no evidence that he believed there was ‘an invisible hand of the market’.

I always consider it a travesty of good sense to believe that those with whom you disagree on politics embody all the worst features of human behaviour and thinking, while your other lot encompass all the virtues. Neither the ‘left’ nor the ‘right’ have a monopoly of what is commendable in what Smith called humanity.

Once More With Feeling

‘Definitely a must read for anyone interested in buying a house, starting a bank, creating a pricing scheme for a product set, or just understanding the idiocy of our current economic dogma. Dan Ariely explains in everyday (if not too everyday sometimes) language how and why we as consumers are NOT in fact rational consumers that obey Adam Smith's invisible hand, but rather irrational beings that merely like to think that we are logical. The rational model of economics is, really, nothing more than an optimists view of reality: the actual rules of reality, Ariely shows, are a far cry from what we would have ourselves believe them to be.’

CommentTypical comment from those who buy the modern myth of Adam Smith’s invisible hand.

It does not even correspond to what Adam Smith wrote about the invisible hand in Wealth Of Nations, which ‘niftynei’ would realize if he read the single reference to the metaphor (Book IV, chapter 2, paragraphs 1-9).

Smith made no statements about ‘rational’ consumers ‘obeying the invisible hand’. In fact, his point about the metaphor of the invisible hand had nothing to do with consumers, or markets, or so-called rational consumers.

He referred to some – BUT NOT ALL – merchant traders who preferred to invest locally in their own country rather than engage in foreign trade because of the additional risks of sending their capital abroad. He used the metaphor of an invisible hand to reinforce what he had explained in the 8 paragraphs before he mentioned ‘an invisible hand’ as a metaphor fin paragraph 9.

Those merchants who invested locally were ‘led by an invisible hand’ metaphorically to express in a ‘more striking and interesting manner’ what they insecurity led them to do. That is the role of a metaphor, according to Adam Smith’s Lectures on Rhetoric and Belles Lettres (given at Glasgow University 1762-3, p 29). He delivered his lectures on rhetoric regularly between 1748-1763 and showed that metaphors describe their ‘object’ in a ‘more striking and interesting manner’. The invisible hand was a metaphor, not a noun – there was no invisible hand compelling anybody.

The other merchants, who were less risk-averse, clearly were not ‘led by an invisible hand’, because they invested abroad instead. Both sets of merchants behaved according to their tolerance for risks.

The consequence of the risk-averse merchants from their investing locally was a larger local annual output than would otherwise occur if they overcome their ‘insecurity. The arithmetic rule of ‘the whole is the sum of its parts’ fully explains this consequence.

The notion that Smith wrote what is claimed for him about the invisible hand is a wholly invented myth from the 1950s. He was not a believe in Homo economics, rational consumer or slave to the metaphor.

Friday, May 07, 2010

Samuel Brittan on the Invisible Hand

The venerable economist and top journalist, Samuel Brittan, writes on “A credo for a revived capitalism”, HERE:
In the Financial TimesHERE

‘Shorn of these extremist statements, the basic case for competitive markets is still Adam Smith’s invisible hand. A trader or a manufacturer will make most profit if he supplies what consumers most want at the lowest possible cost. There is the American saying that if you invent a better mouse trap, the world will come rushing to you. This core statement says nothing about capitalism. You could have state-owned enterprises or workers’ or consumers’ co-operatives competing for profit. It is just a fact that wholesale “market socialism” has never worked, even though there have been outstanding individual successes such as the John Lewis Partnership or Mondragon.

What, then, are the main exceptions to the doctrine of the invisible hand or, to put it more positively, the areas requiring state intervention. I leave aside the antitrust case against monopoly, which is relatively uncontroversial, except to note that many monopolies owe their strength to state barriers or subsidies, especially in foreign trade. The other main areas of “market failure” are:

1. Externalities.

2. Public goods.

3. Income and wealth distribution. .

These categories were analysed nearly a century ago by a Cambridge economist, A.C. Pigou. They can only provide a framework, which has to be filled in by case-by-case examination and broad political judgment. We also need to remember a further consideration not discussed by the pioneering economists. This is “government failure”. It is a controversial category. But there are aspects that can be analysed, such as the incentive to undertake activities whose benefits are highly concentrated, perhaps in key constituencies, but whose costs are thinly spread. Support for the arms trade is an obvious example.”

Comment
You should read the whole article (copyright considerations, etc.,) from the FT (follow the link).

With some respectful diffidence, I offer some criticism of Samuel Brittan’s take on ‘the basic case for competitive markets is still Adam Smith’s invisible hand’. Adam Smith certainly made strong cases in Wealth Of Nations for ‘competitive markets’; he also mentioned the metaphor of ‘an invisible hand’ only once in Wealth Of nations (and only once in Moral Sentiments), but he did not mention the metaphor of ‘an invisible hand’ in connection with ‘competitive markets’. The notion that he did is an invention from the 1950s onwards.

Check it out: WN IV.ii.9: 456.

His single reference in Wealth Of Nations uses the invisible hand as a metaphor, not as a noun. In short, the invisible hand did not exist in Smith’s thinking. But as a metaphor, Smith’s use was purely literary. He used the metaphor to describe its object in a ‘more striking and interesting manner’
.
We know this from students’ notes of Adam Smith’s Lectures on Rhetoric and Belles Lettres (1762-63; 1983, page 29: Oxford University Press).

The object of the metaphor was not a competitive economy. He was explaining why some, but not all, merchants preferred to invest their capital locally (obviously, other merchants then as now did invest their capital abroad). He put this preference down to the degree of risk that they perceived present in home versus foreign investment. Having explained through 8 paragraphs the phenomenon of the merchants’ sense of his ‘own security’ he described the consequences of local investment – it added to national profitable output and employment – basically from the arithmetic rule that the whole is the sum of its parts.

The metaphor he used for this purpose of describing these behaviours was the popular 18th-century literary metaphor of the merchants being ‘led by an invisible hand’. The was certainly ‘more striking and interesting in a ‘word or two’ than 9 paragraphs of close argument. We know it was close argument because most modern economists regard the metaphor as a noun – they believe it describes something that exists, that it resides and operates in some unspecified manner in markets (sometimes described as ‘miraculous’ or ‘magical’).

We also know that Smith was not referring to perfectly competitive markets – nobody would consider that18th-century foreign trade markets were competitive (mercantile political economy, Navigation Acts, Chartered trading monopolies, tariffs, protection and prohibitions, which Smith railed against in Book IV) and neither would they consider domestic, local markets were competitive (Statute of Apprentices; Settlement Acts; Trade Guilds in Incorporated Towns).

Perfect competition in no way describes 18th-century markets, hence the invisible hand was not a metaphor for such markets as its object.

One origin of such notions was Paul Samuelson’ otherwise excellent textbook, Economics: an introductory analysis, 1948, page 36, and through the following 18 editions. This textbook dominated economic teaching for 62 years, selling 4½ million copies in 40 languages.

It’s time for the discipline realize this modern error. Interestingly, Samuelson in the 1948 reference above said of the invisible hand had caused ‘more harm than good’ among students, who then went on to become ‘leading citizens’ with an inbuilt complacency about market failures and related state interventions.

Thursday, May 06, 2010

A Libertarian With Sensible Doubts About the Invisible Hand

Shawn Reed posts in Journal Talk (HERE) a comment on Dan Klein and Brandon Lucas’s article: “In a Word or Two, Placed in the Middle: The Invisible Hand in Smith’s Tomes”, HERE: discussed on Lost legacy in February.

‘I find myself, in general, agreeing with the possibility of a phrase in the middle being of extra-importance, somehow, to Smith, but I do find some of the arguments for that importance to be somewhat lacking, even to one inclined to be supportive of the notion, to say nothing of how a reader unsympathetic with the priority of the Invisible Hand in Smith would take the arguments. …

The Invisible Hand is certainly an important idea, especially to those of us sharing libertarian/free-market priors, but I am not convinced that its location in the book is much more than a divined pattern where no pattern exists. If our minds are predisposed to see stories where no story exists, could this not likely be one of those instances? …

There seem to be two main cases discussed in the paper for why smith would put something so central in the middle (contrary to the general inclination of putting the important at the beginning or the end). Either Smith was intentionally obscuring his controversial views from the censors/casual readers, and leaving that controversial view to be found by those with eyes to see, or he saw a certain aesthetic value in having his most important thought in the middle. If he was being intentionally obtuse, what was Smith hiding from? Religious persecution? Doubtful. Political outrage/maintaining his cultural royalty position? If that were the case, aren’t there enough other other relatively incendiary/anti-government-intervention passages in the book that would succeed in pissing someone off if they were going to get pissed off by the idea of an invisible hand doing better at organizing markets than their own machinations? If “economics is a challenge to the conceit of those in power,” then isn’t that challenge made clear elsewhere? Why bother with esoteric writing when so much of it is exoteric? I realize that, having still not read any leftist understandings of Smith, I may still be laboring under the false notion that Smith’s pro-market, anti-governmental-intrusion (by and large) is plain to any fair-minded reader encountering WN and TMS. Perhaps I already have had the blinders lifted, so to speak, and I would be labeled a loon if I were to explicate Smith with my modern eyes in 1780. In what ways would Smith’s Invisible Hand be a challenge to the status quo, that he would need to obscure its centrality?’ …

CommentThe doubts expressed so thoughtfully by Shawn Reed are worthy of readers of Lost Legacy following the links and reading them through. Let me explicate what was going on in Smith’s mind based on careful interpretation of exactly what he was doing. My view is that the Invisible Hand as used by Smith was meant metaphorically. We do not have to read into the two occasions on which he used the metaphor complex deeper mysteries ascribed to Smith as argued by Klein and Lucas. On the evidence that Klein and Lucas have assembled so carefully, I accept that the centrality of the metaphor in both of his books was intentional (see Lost Legacy: October, November 2009, and April 2010) but the question is: what was Smith’s intention? I wrote a detailed answer to Klein and Lucas is ‘The Centrality of the Invisible Hand in Smith’s Books: Using a Metaphor as an Antidote to 'Tiresome' and 'Less Pleasant' Narrative Styles’, which is downloadable (free) on the Social Science Research Network (SSRN) here:

Briefly, Smith had no need to hide his basic critique of the prevailing ideology of government intervention, known as Mercantile Political Economy. He carefully avoided attacks on living individuals, was deferential to the King, raised no flags of revolution and was circumspect in his policy recommendations. He was no ideologue; his proposals tended to be modest.

Abstract:

‘Daniel Klein and Brandon Lucas’s highly original article (from a suggestion by Peter Minowitz), “In a word or Two, Placed in the Middle: the invisible hand in Smith’s Tomes” (October, 2009) is discussed. This paper presents an alternative account of the role of the metaphor in Adam Smith’s thought. Part 1 (‘Centrality of Smith’s Invisible Hand metaphor’) acknowledges the persuasive evidence from Klein and Lucas for the physical centrality of the metaphor in Smith’s two books. In support of centrality, details are provided of his close involvement in the print production of his books. Part 2 (‘Smith on metaphors’) considers Smith’s teachings on the use of metaphors. Part 3 (‘Significance of the invisible-hand for Smith’) discusses the two cases where Smith used the invisible hand as an antidote to ‘tiresome and less pleasant’ narrative styles by showing that a metaphor represents in a ‘more striking and interesting manner’ their objects, using the examples of how ‘rich landlords’ and some ‘merchants’ acted in conformity with the absolute necessity of their circumstances, with unintended consequences. Misleading explanations by Paul Samuelson and others derived since the late 1940s of Smith’s use of the invisible-hand metaphor are challenged.’

To Download a copy of the text from the Social Science Research Network, visit HERE:

Further comment:Smith also lectured on Rhetoric and we have student notes of those lectures (Lectures on Rhetoric and Belles Lettres: 1762-63 [1983: Liberty Fund]). And in the same chapter Klein and Lucas derived the centrality thesis, Smith made specific references to the role of metaphors, which he illustrated, once each in both Moral Sentiments and Wealth Of Nations.

In both examples, once in Moral Sentiments and once in Wealth Of Nations, the context was definitely not about competitive markets. There was nothing competitive about life for labourers and their families in the quasi-feudal regimes of ‘Rich landlords’ (TMS IV.ii: 184-85), nor for merchants in 18th-century mercantile Britain (WN IV.ii.9: 456).

Neither circumstance was driven by market considerations: the landlords had no choice but to feed their serfs out of their grain stores if they were to be fit to labour for them on the land each season and survive the winters each year, and the merchants who chose to invest locally were led by their insecurity over sending their capital abroad, hence some, but not all, preferred to invest only at home where their capital was within their sight and control. Necessity led landlords to supply food to their labourers and the insecurity of merchants led them to invest locally. These were the objects of the metaphor of ‘an invisible hand’.

The metaphor of an invisible hand that ‘led’ landlords and some merchants to behave as they did was expressed by the metaphor in a ‘more striking and interesting manner’ (see Smith on metaphors in his Lectures on Rhetoric and Belles Lettres; 1763-63; 1983: 29). That’s all!

From the metaphor – hardly noticed until the late 19th century – a theory has been invented linking it to the market (even to the ‘hand of God’) from the 1950s, which was not justified by the context in which Smith used the metaphor, nor by Smith’s avowed use of metaphors in his lectures that he taught his students. The erroneous belief in the 'mystical' - even 'miraculous' - invisible hand led many economists to attribute to markets wondrous powers they never had and in broadcasting their beliefs they misled themselves and those they influenced into a complacency that ignored what was happening in the real world as shown in the current financial crisis - as witnessed by Greenspan's confession last year.

Shawn Reed has begun his journey towards the truth about the invisible hand. I hope what he reads may help him clarify his current doubts and questions.

A Step Towards Clarity on the Invisible Hand

Stephen LeRoy, professor emeritus at the University of California, Santa Barbara and fellow of the Reserve Bank of California, writes in the FRBSF Economic LetterHERE

Is the “Invisible Hand” Still Relevant?

The single most important proposition in economic theory, first stated by Adam Smith, is that competitive markets do a good job allocating resources. Vilfredo Pareto’s later formulation was more precise than Smith’s, and also highlighted the dependence of Smith’s proposition on assumptions that may not be satisfied in the real world. The financial crisis has spurred a debate about the proper balance between markets and government and prompted some scholars to question whether the conditions assumed by Smith and Pareto are accurate for modern economies.

The single most important proposition in economic theory is that, by and large, competitive markets that are relatively, but generally not completely, free of government guidance do a better job allocating resources than occurs when governments play a dominant role. This proposition was first clearly formulated by Adam Smith in his classic Wealth of Nations. Except for some extreme supporters of free markets, today the preference for private markets is not an absolute. Almost everyone acknowledges that some functions, such as contract enforcement, cannot readily be delegated to market participants. The question is when and to what extent—not whether—private markets fail and therefore must be supplanted or regulated by government.

CommentThis is a sensible and timely article on an important economic issue provided that readers ignore the headline, which has nothing to do with its content. It doesn’t mention the invisible hand again, so, presumably it is the work of a sub-editor and not that of the author.

In fact it follows a line of argument that Paul Samuelson wrongly cast ad being about Adam Smith’s invisible hand. Samuelson linked the invisible hand directly to Pareto Optimality and Arrow and Debreu’s formulation of the General Equilibrium thesis. Stephen LeRoy casts Pareto and Debreu’s mathematical ‘proof’ of competitive markets as an alternative to Adam Smith’s views on competitive markets (sans the invisible hand).

The difference between this approach and Samuelson’s is instructive. In retrospect, if Samuelson had confined himself to LeRoy’s approach it would have saved the entire economics profession from raising the invisible hand from only being a ‘more striking and interesting’ metaphor to that of an invented ‘doctrine’, ‘theory’, ‘idea’, even ‘paradigm’, now ubiquitous in discourse of former students of economics in the last 6o years, in the upper reaches of government, public service, media opinion formers, legislators and those who influence them.

Despite what Adam Smith says in his Wealth Of Nations about the use of the metaphor of an invisible hand, most economists (though there are signs now of dissent appearing among some of them – Stiglitz for instance) do not even read the objects of the many metaphors that Smith used in his books. They leap to the conclusion that the invisible hand for him was about markets. It certainly is believed to mean that for most economists since the 1950s.

In both examples, once in Moral Sentiments and once in Wealth Of Nations, the context was definitely not about competitive markets. There was nothing competitive about life for labourers and their families in the quasi-feudal regimes of ‘Rich landlords’ (TMS IV.ii: 184-85), nor for merchants in 18th-century mercantile Britain (WN IV.ii.9: 456).

Neither circumstance was driven by market considerations: the landlords had no choice but to feed their serfs out of their grain stores if they were to be fit to labour for them on the land each season and survive the winters each year, and the merchants who chose to invest locally were led by their insecurity over sending their capital abroad, hence the preferred to stay at home within their sight and control. Necessity led landlords to supply food to their labourers and the insecurity of merchants led them to invest locally. These were the objects of the metaphor of ‘an invisible hand’.

The metaphor of an invisible hand expressed his descriptions of these considerations in a ‘more striking and interesting manner’, as Smith put it in his lectures on metaphors in his Rhetoric (1763-63; 1983: 29).

As more economists become aware of the truth about the origins of the invisible hand and de-couple the modern interpretation from Adam Smith's name, the better it will be for the reputation of the discipline from false doctrinaire myths about how markets work.

Monday, May 03, 2010

'We Are All Smithian's Now': New PhDs from GMU

I take the unusual (and unauthorised step) of reprinting a post from Coordination Problem (formerly Austrian Economists) Blog HERE: announcing the introduction of a new PhD programme on Smithian Political Economy at George Mason University, Virginia.

This will be delivered by Daniel Klein, Russ Roberts, Don Boudreau (with associate inputs from Peter Boettke and David Levy). For those acquainted with Smithian studies, that is a formidable line-up of all the talents.

Read the details Peter Boettke below and if you are young enough (and good enough) it should cause you to salivate.

[If you are past it and retired, it might make you shed a tear of regret of hopes unfulfilled at past lack of opportunities.]

“Smithian Political Economy at George Mason University”:

“I have often described GMU's PhD program to prospective students as "the best weird place to study economics in the world." When Colander and Klamer did the interviews for The Making of An Economist, they mainly limited their interviews to the top 5 schools, but this was my professional cohort, and I was interviewed by both. Colander has never talked much about the interviews outside of the elite programs, but Klamer has. In Klamer's interpretation, the students at schools such as The New School, UMass-Amherst, and George Mason University, had a different passion for economics than those at Chicago, Harvard, MIT, Stanford and Princeton. It was this difference of passion among the students for the discipline of economics that fascinated Klamer. The issue of passion for economics was not the primary target that Colander was focused on in that book, or in his follow up project two decades later.

GMU has since the establishment of its PhD program in the early 1980s always chosen to "dare to be different". The intellectual environment here for research and graduate education is unique not just due to the presence of the different paradigmatic perspectives: Austrian, Public Choice, Experimental, New Institutionalism; but also the blending of these traditions to form something unique (Masonomics) --- Austrianism Institutionalism; Experimental public choice; Austrian experimental, etc. Moreover, GMU has also offered fields that are not always offered at other programs: Law and Economics, History of Thought, Economic History, Comparative Economics, Constitutional Political Economy, Development, etc. Yes, we have Industrial Organization, Public Finance, and Monetary, but we also have the more specialized specializations listed above. In fact, this is one of the issues that confuses prospective students and outside observers of the program when they try to figure out ranking issues. We have alternative paradigmatic training (among the best places in the world to be trained in those perspectives) and we have specializations which are under-represented elsewhere (and we are among the best places to study in those areas). Conventional rankings often don't look at those areas of specialization, but when they do we don't just come out "good" we are listed among the elite departments.

My colleagues Dan Klein, Russ Roberts and Don Boudreaux are continuing in this tradition of "daring to be different" and starting next academic year will be offering graduate students in our program an opportunity to get a "field" in Smithian Political Economy. Students will be able to take a course sequences concentrating on Smith's works, and also participate in various reading groups and seminars that Dan Klein will run. Dan and Russ recently had a 6 part conversation on Smith's Theory of Moral Sentiments at EconTalk. Dan has also provided a list of sample field exam questions.

In addition to this Smithian political economy research and education program that Klein, Roberts and Boudreaux will be initiating, there will remain the traditional history of thought track (taught by David Levy and myself) as well as the unique paradigmatic and field specialization mentioned above.

Anyway, the development of this unique research and educational opportunity for students to specialize in Smithian Political Economy is just another example of "GMU is the best weird place to study". We dare to be different here at GMU and do not pursue a cookie-cutter approach to research and graduate education. As I have written before, you can get a very conventional education at GMU if you want to -- you just have to be wise in your course choices and be entrepreneurial in looking for opportunities in Computational Sciences, Center for Social Complexity, School of Public Policy, etc. to supplement your standard training in the first-year. But why would you? As Pete Leeson often stresses to students, the signal isn't sent by class selection, the signal is sent by school selection! (I think he might have first heard that from me, but I will give him credit for it).

Go dig up Klamer's interpretations of those interviews from the mid-1980s, read what he has to say about the passion the students had about the discipline of economics (its history, its current practice, how to teach it best, and what questions to research and what puzzles to solve). Then visit GMU today and you will see the same passion exhibited among the faculty and students. Arjo got it, Deirde McCloskey got it during her visits throughout the years, Jim Buchanan created it, Vernon Smith re-established it. GMU is a very unique place. But it is also a place rooted in the long history of our discipline. As Lord Acton once put it: "it is not the popular movement, but the traveling of the minds of men who sit in the seat of Adam Smith that is really serious and worthy of all attention." We, at GMU, aspire to sit in the seat of Adam Smith. In this we are all Smithian's now.

Adam Smith On Liberty, Laissez-Faire and Justice

David Henderson of Econ Lib(HERE) Conducts a Q and A session with Daniel Klein (George Mason University) on Amartya Sen’s article in the New Statesman discussed on Lost `legacy last week.

The issue turns on how ‘soft’ Smith was for the ‘little guy’ in respect of a tax financed poor relief policy. Klein:

“Saying that Smith "had a soft spot for government welfare" is highly misleading. Smith expounded a presumption of liberty - as you and I understand that term. Even Jacob Viner, an earlier cataloger of Smith's exceptions to the liberty principle, says so. Though he was in an important sense an egalitarian, and an affirmer of distributive justice understood in a libertarian way, he never favored a policy that he construed as forced "poor relief," and never argued on such grounds. He was silent, even conspicuously silent, in the otherwise quite comprehensive WN, regarding the essential feature of the poor law, tax-financed poor relief. At the opening of WN he says that he shows "what are the necessary expences of the sovereign, or commonwealth ...", and, in the spirit of enumerated powers, we might infer that he did not regard the poor law as "necessary." Indeed, there is a lot of textual evidence indicating that he would not be supportive of the redistributive state.”

CommentDaniel Klein equates “laissez-faire” with the “liberty principle”, as he does the “invisible hand”. Wealth Of Nations is a polemic (Book IV) against mercantile political economy.

Laissez-faire is a phrase first stated (significantly) by a merchant, not a consumer, to the French Minister of Finance who had already instituted French-style regulations on trade fares and town markets (if you know France you will know French ‘logic’ in regulations). This was laissez-faire liberty for merchants, nothing was said about consumers.

Liberty for Smith was a philosophical tradition going back to Grotius and Puffendorf, based tightly on legal principles. It superseded patricular economic systems. Smith taught Jurisprudence at Glasgow (1751-64) and was firmly rooted in law and justice (see student notes of his Lectures in Jurisprudence, 1762-63, Liberty Fund 1982). Liberty is this sense is often treated as a synonym for the merchants’ 17th century plea for laissez-faire – it isn’t. And Smith never mentioned laissez-faire in Wealth Of Nations and he was intimate and familiar with the French Physiocrats who tried to popularise it.

For Smith, Liberty was not anarchy; it was a legal prejudice in favour of freedom within Natural Liberty. But nor did he regard Natural Liberty as a pre-condition for progress towards opulence. He chastised Physiocrats (naming ‘Mr. Quesnai’, a physician) for ‘entertaining the notion’ that the ‘political body’ would only thrive under ‘a certain precise regimen, the exact regimen of perfect liberty and perfect justice’. Indeed, Smith adds, ‘the bad effects of political economy’ which ‘retards and more of less is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity and still less making it go backwards’.

To which Smith appends the devastating evidence of history (all economic systems and all degrees of oppression): ‘If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation that could ever have prospered’. (WM IVix.28: 674) In short, while desirable under Natural Liberty, it was neither necessary nor sufficient to take a nation to opulence. That is an important assertion and it guided Smith’s many suggestions for partial changes within the mercantile political economy of which he criticised specifically in Wealth Of Nations.

His criticism of the mercantile acts of government from Elizabethan times (Apprentices, Town Guilds, Settlement, Corporate town monopolies, etc.,) was directed at their poverty-inducing consequences. To avoid taxes to relieve the poor, the income earners of a locality had an incentive to reduce the numbers of poor by moving them on and destroying their houses (hovels) to reduce the poor rolls; these laws prevented poor people settling elsewhere looking for work.

Smith’s views on ‘the little guy’ (a lovely Americanism) are broadly sympathetic on natural liberty and justice grounds. They are trifle more subtle than modern readers sometimes appreciate, especially in trying to back project onto Smith distributive justice in the modern sense.

In Smith's day distributive justice did not have the same meaning it has today.